Another day, another set of worrying data from commodities glutton China. The country — which is the world’s second largest oil consumer, of course — has announced that crude import volumes tanked 13% in August from the previous month, to 26.59 million tons.
Although optimists will point out that total oil purchases during January-August are up 10% from the corresponding 2014 period, last month’s 5.6% year-on-year gain adds support to the idea that the Chinese economy is rapidly running out of steam.
Monday’s news has sent the Brent price further below $50 per barrel, and the benchmark was last camped out around the $49.30 level. This still provides a slight cushion from the six-year lows of $42.50 punched late last month, but I believe crude prices are in danger of plunging again as the steady stream of poor data from Beijing shows no sign of letting up.
Supply woes set to persist
It is generally acknowledged that oil demand continues to rise, and the International Energy Agency (IEA) noted last month that black gold consumption was rising at its quickest pace for five years.
The body now expects 2015 demand growth to clock in at 1.6 million barrels per day, and by 1.4 million barrels next year thanks to ultra-low prices. “Oil’s plunge below $50 barrels a day from triple digits a year ago has seen demand react more swiftly than supply,” the organisation noted.
However, the IEA commented that supply cutbacks remain slow and are therefore likely to keep prices corked for some time yet, commenting that “while a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016… suggesting global inventories will pile up further.”
Indeed, the number of rigs operating in the US shale sector has begun to steadily creep higher again thanks to the stabilising crude price, offsetting the effect of rising consumption levels. When you throw into the equation OPEC’s commitment to rebuilding its market share; output from the North Sea striking multi-decade highs; and Russian producers pumping like there’s no tomorrow, any blip in the global economic recovery is likely to send oil prices tanking again.
Operators under massive pressure
Such developments make terrifying reading for the likes of Premier Oil (LSE: PMO), whose latest financial release last month showed the business swing to a $214.7m pre-tax loss during January-June. It had recorded a profit of $50.7m in the same period last year.
Metals and energy play Vedanta Resources (LSE: VED) — which generates a fifth of total revenues from fossil fuels — has also seen profits tumble thanks to the plummeting oil price. Consequently the firm has been forced to write down the value of its Cairn Energy oil division by a huge $3.1bn.
And over at Enquest (LSE: ENQ), the economic health of the business is coming under increased scrutiny as brokers take the hatchet to their crude price forecasts. The firm’s colossal net debt pile is also stomping higher — this registered at an eye-watering $1.28bn as of June — while costs in the North Sea are also rising. I believe that Enquest, like the rest of the oil industry, remains at risk of prolonged profits pain as the oil market balance endures.
